My Alternate Opening Statement

After I wrote my opening statement for my debate with David Balan, I was suddenly tempted to start over. My thinking: Since the resolution is, "Significant governmental involvement in health care is both economically sensible and morally just," maybe I should just try to demonstrate that Balan's complaints about a free market in health require only insignificant government involvement. I resisted temptation before the debate, but now seems like a good time to surrender to it. As Groucho Marx said, "Those are my principles; if you don't like them, I have others." Here goes.

David Balan's overriding complaint about a free market in health care is that it fails to care for the poor - especially the deserving poor. Unlike many economists, he puts little emphasis on the adverse selection problem. Balan admits that health insurance companies are actually quite good at figuring out which clients are high-risk. As a result, people who have chronic medical problems through no fault of their own can only buy insurance at very high rates.

Fortunately, the government can handle this problem without spending trillions or heavily regulating the insurance or medical industries. All it needs to do is provide a means-tested subsidy to make private health insurance more affordable for those who need it most. The subsidy should be based on income, wealth, chronic health status - and, given Balan's focus on the deserving poor - on past and current behavior. People who engage in voluntary risky behaviors - smoking, drinking, over-eating, mountain-climbing, violence, etc. - should receive a smaller subsidy, or no subsidy at all. The same goes for people who failed to buy long-term insurance when they were healthy and employed, then ran into health or financial troubles.

It's hard to say how much this would cost, but it would clearly be far less than government spends today. The deserving poor are a lot less numerous - and healthier - than the elderly. There's nothing in Balan's principles that precludes substantial co-payments. And as Balan himself suggests, there's no obligation for the government to subsidize insurance if there aren't any cost-effective treatments.

What about Balan's other concerns? After the government helps out the deserving poor, a few other minor interventions pass the cost-benefit test. The government can keep programs to fight contagious disease. It can impose certification - but not licensing - to protect poorly informed and naive consumers. This is a sensible way to protect patients without endangering the markets' ability to prudently cut costs. The government can also offer prizes (not grants!) for non-patentable medical discoveries.

Do all these concessions add up to "significant" government involvement? I'll say no. Government spending would probably add up 1-2% of GDP, and at least 90% of the regulations we take for granted would be stripped away. We'd also say goodbye to decades of anti-market demagoguery. We'd stop repeating the Big Lie that a free market in health is impossible - and stop scapegoating insurance companies for their understandable reluctance to sell unprofitable policies. Instead, we'd subsidize the deserving poor, label the quacks, correct a few externality problems, and let the market work.

How about it, David?

Comments and Sharing

Most of what you suggest doing now is exactly what the bill does. And it is a terrible, terrible plan. Much like welfare in the 70's it will severely damage people's incentive to get better jobs by increasing the effective marginal tax well over 100%.

It can impose certification - but not licensing - to protect poorly informed and naive consumers.

I'll say to you what I said in response to Balan. Can the government impose certification to protect poorly informed and naive consumers? How many real world governments have banned homopathy? Or even required certification of practitioners to pass on truthful information about it?

Doc Merlin: The bill just passed doesn't means-test. It does the opposite of what Bryan describes. That is, it prevents insurance companies from pricing based on illnesses, even if those illnesses are self-caused or a person was insufficiently careful about buying insurance. Both plans increase marginal tax rates, certainly, but one does so for a small fraction of the population and the other for practically a third.

Tracy W: the government effectively certifies lots of occupations. They already impose licensing on doctors to "protect" poorly informed consumers. Making the switch from one to the other shouldn't be difficult, except for voter opposition. (Of course, Bryan is talking ideal policy.) My guess why politicians haven't done anything about homeopathy? It's not because they have no power to certify it. It's because voters like homeopathy. It's safe, since it's mostly water, but it's not effective. Voters care about the first much more than the second.

Bryan: I like this response better. It's a weaker position, but it seems defensible to a much wider range of people.

Can the government acquire and competently use all the knowledge we are talking about here, and what are the implications of pols and bureaucrats inquiring into so many aspects of people's behavior?

I agree with concerns raised about perverse incentives. This goes back at least to the 80s with Charles Murray's book Losing Ground. The more help given to the poor as a legal entitlement, the stronger the disincentive to become non-poor under their own power.

At least no one expects that government support will provide food, clothing, and shelter at the same level of opulence as the middle class and rich can afford. But I get the impression that much of the push for government-sponsored health care or health insurance is premise on the notion that in this area, whatever someone can afford, everyone else is entitled to. That idea is the fast track to socialism.

A problem is that people have VERY different definitions of the "deserving poor." For many, the "deserving poor" extends well past the median income...

At a talk in Chicago, David Cutler polled the audience, asking at what level of income can a family be expected to pay for the average $14,000 insurance policy without government assistance. Only ONE person besides me raised their hand for $50,000 while a lot of hands went up in the $90,000 to $100,000 region.

But the average income is in the region of $50,000! Basic numerical literacy is a problem here... no matter what the structure, the average income is not going to receive a net subsidy from the government. People need to understand this.

In 2007 in California, at any point in time:
13.2% uninsured
14.7% on Medicaid and/or SCHIP (no Medicare)
11.3% on Medicare (or Medicare and Medicaid)
1.6% on other public

Swimmy: I agree that the government imposes licensing to "protect" poorly informed consumers. What I am questioning is the extent to which real world governments actually protect poorly informed consumers, as distinct from "protecting" them with full use of scare quotes.

I agree with you that voters do on average, either not care much about homeopathy, or positively like it, and that strikes me as an adequate explanation for why real world governments don't ban it. This is why I am so skeptical about the ability of real world governments to protect naive or poorly informed consumers - that they so seldom protect consumers from homeopathy, which I am picking on because it's so clearly nonsense.

Now let me think. What is the cumulative value of smoking one cigarette per day vs not having heartburn vs once bungee jumping vs never drinking and earning $47,256 in salary, while supporting one teenage child and a wife?

Aside from being intrusive, arbitrary, subject to lying and based on zero science, what does this evaluation have going for it?

Aren't smokers EXTRA deserving? By voluntarily shortening their lives by many years, they relieve the burden of supporting them into their 80s. That is, in terms of accounting, shouldn't we reward smokers by increasing their subsidy? Same with mountain climbers, actually. If you fall off, you fall off when you're 30.

@Sam M: if you take into account the costs saved by smokers, you also have to take into account the extra costs they impose on the society i.e. higher taxes other people have to pay for the smokers' healthcare.

"It's hard to say how much this would cost, but it would clearly be far less than government spends today."

You know, I thought this was a forum where people who understood economics were commenting.

"free market" profit maximization has been controlling health care costs just as any intro to micro econ says it will. Since 1980 especially, US health care has shifted dramatically from mostly not-for-profit to mostly for-profit, and costs, normally referred to as health care revenue has grown faster than inflation/CPI as the profit motive drives revenue higher by taking more of the total economy.

No one complains when the mobile phone market takes a big bite out of your income, much bigger than it did in 1980 when the best offering was a bag phone of questionable service. Many think the "land line" phone is of the past and a $100 a month cell phone a necessity.

In 1980, people paid maybe $20 for cable to save the hassle of an antenna, plus maybe a few extra channels, but today cable is a major slice of most people's income, and many think it is a necessity, surprised broadcast TV exists.

In 1980, almost no one spent anything on computers, but thanks to profit seeking, total spending on computers is massively greater, and a computer is seen by many as a necessity for everyone.

But it is true that health care isn't completely free market, for if it were, health care revenue aka costs aka spending would be much higher. Government has tried to squeeze profit out of some sectors to cut costs, but again, this is another thing most people see as a necessity so they queue in physical lines and in virtual lines to get health care even from the not-for-profit health services.

By let's be clear the past three decades has been a big success for profit controlled health care costs; no other nation has come close to matching the revenue generation of US health care in search of profit because they deny profit to much of their health care system.

More libertine fantasy. We would not leave the undeserving poor to cough out their lives at the side of the road, no matter how much damage they had done to themselves with tobacco.

If we doubt this, just look at our societal responce to Acquired Immunodeficiency Syndrome.
Statististically, this condition is almost always acquired through elective behavior. And yet, we seem to treat the unnatural and unsanitary practices leading to infection as though these abominations were a sacrament.

""free market" profit maximization has been controlling health care costs just as any intro to micro econ says it will. Since 1980 especially, US health care has shifted dramatically from mostly not-for-profit to mostly for-profit, and costs, normally referred to as health care revenue has grown faster than inflation/CPI as the profit motive drives revenue higher by taking more of the total economy." - mulp

Not sure what planet you're on, but on this planet, in America, your statement is completely false. Not only has the health industry become more and more heavily regulated (barring new entry and destroying competition) and more and more dominated by the market power of Medicare, but subsidies and soft budgets have removed the loss constraint from many health care providers as well.

In general I like this proposal, except that I think its both unworkable and morally and economically unwise to try to prevent those with "bad behavior" from receiving health care subsidies (or vouchers).

The poor (including some elderly who did not purchase insurance earlier) and those with pre-existing conditions must also receive vouchers. This would make the program more expensive (though you'd save on bureaucracy) and you'd encourage some to opt-out of buying insurance for themselves, but if you kept the phase-out threshold low enough this would be as workable as any means tested voucher program.

The voucher could based on the percentage of income required for full coverage. Those with pre-existing conditions (and the elderly) require a larger voucher for full coverage, so their income level could be higher and still qualify.

How do we prevent such a program from funding all elderly then? Well, if the insurance market is otherwise completely free (as Bryan said, 90% of regulations are all gone, no Medicare or Medicaid, just vouchers which allow people to purchase from free competing firms) then costs should fall and most adults, not qualifying for subsidies, will buy insurance on their own. In order to take advantage of the vouchers when they are old they would have to not save for retirement and drop the insurance they had - a risky move.

"you also have to take into account the extra costs they impose on the society i.e. higher taxes other people have to pay for the smokers' healthcare"

But I am positing that smoking actually saves in terms of healthcare costs. Yes, taking care of a 65-year-old with lung cancer is expensive. But it's often LESS expensive than having that smoker quit smoking, live to 85, and take a fistful of heart meds and diabates treatments everyday for an extra 20 years. We also pay the smoker considerably less in Social Security and other benefits if they die young.

Blogging software: Powered by Movable Type 4.2.1.
Pictures courtesy of the authors.
All opinions expressed on EconLog reflect those of the author or individual commenters, and do
not necessarily represent the views or positions of the Library of
Economics and Liberty (Econlib) website or its owner, Liberty Fund,
Inc.

The cuneiform inscription in the Liberty Fund logo is the
earliest-known written appearance of the word
"freedom" (amagi), or "liberty." It
is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.